Ferment Over For-Profit Colleges

Submitted by Doug Lederman on June 16, 2009 - 3:00am

ORLANDO -- The last few weeks have witnessed a truly remarkable discussion in Washington and on Wall Street surrounding for-profit higher education.

Reports (and sometimes rumors) about the prospect of tougher federal regulation of career colleges by the Obama administration have made the rounds among Wall Street analysts, driving the stocks of the largest, publicly traded companies in the sector down by more than 20 percent and prompting the U.S. Education Department two weeks ago to hold unprecedented conference calls[1] with investors and analysts to try to reassure them that department officials did not have it in for for-profit colleges.

That step did not calm the markets, though, in large part, many observers of the for-profit market assert, because several "short sellers" -- investors who bet that the value of a certain stock or group of stocks will fall -- have been doing their best to promote uncertainty on Wall Street. On Monday, a leading department official took another shot at it at the annual meeting here of the Career College Association, which represents most of the country's for-profit institutions.

"I can stand here and tell you that I've been at the Department of Education for 30 years, and I have never heard any one of our policy officials say, 'We've got to get that sector. Let's put it to the for-profits,' " said Dan Madzelan, who is the acting assistant secretary for postsecondary education. “That is not how any of our policy officials operate. They’re concerned about what’s best for students and taxpayers, and agnostic with respect to the kind of institution affected. They are not interested in singling out any one sector.”

That language differed little from the words that Robert Shireman -- the deputy under secretary for education and the person whose alleged animus for for-profit higher education has been the primary bogeyman for those predicting the sector’s downfall in recent weeks -- used in last month’s calls with investors.

"Our overall goal at the Department of Education in postsecondary education is to make sure that students -- potential students -- whether young or old, have access to college, they have the information they need to make good choices, and that they have good quality postsecondary education that serves both them as students and taxpayers as well," Shireman said. "If that's not the case, if there is not quality, we want to know about it and if we can, we want to do something about it. Whether that involves a public institution, a nonprofit, a for-profit, a two-year, a four-year, a trade program, whatever type or sector of institution, we want to do all we can to make sure that we good quality and get the degrees and certificates that we need in this country."

So why haven’t department officials’ repeated assertions that they aren’t out to get for-profit colleges managed to reassure some people in the sector? Do most career college officials believe that their institutions have a target sign on their back in the Obama administration? And what does it say about for-profit higher education that the Education Department’s leaders even care what Wall Street analysts say?

Those are other questions were much discussed by at least some of those attending this week’s Career College Association meeting, though hardly by most people here. While the public conception of for-profit colleges is dominated today by the handful of national companies whose campuses are found just off the highways in many American cities -- the University of Phoenix, DeVry, Kaplan Higher Education, to name several -- the vast majority of career colleges are still the mom-and-pop truck driving, beauty and, increasingly, allied health schools that have been mainstays of many towns for decades. While those institutions, too, are subject to Education Department regulation of higher education, they have little to no stake in what Wall Street analysts say or think about their bigger cousins.

The publicly traded companies, however, have a great deal at stake in what the analysts and investors say, and in recent months, a small number of them have been saying not-so-flattering things. Perhaps most prominent among them has been James Chanos, an analyst at Kynikos Associates who, in several recent presentations at investor conferences and on television shows like James Cramer’s "Mad Money,"[2] has been comparing for-profit education companies to health care companies that make excessive profits by feeding at the public trough (in the colleges’ case, through the Pell Grant and federal student loan programs).

Chanos’s thesis, which has been embraced by several other analysts who follow the for-profit sector, is that the Obama administration (unlike its predecessor) is preparing to crack down on such corporate behavior. (A PowerPoint presentation he gave at an investor conference last month features an image of Obama in a cowboy hat under the tag line “There’s a new sheriff in town.”) Obama’s chief deputy in higher education in this line of argument is Shireman, and it was his appointment to the Education Department’s leadership in early February that started the Wall Street decline.

The biggest dust-up, though, came last month when the department announced[3] that it would undertake a new round of negotiations over possible changes to federal regulations governing policy areas, such as incentive compensation paid to student recruiters, that are predominantly a factor among career colleges.

The announcement of the new regulatory review was made quietly (as is the norm) in the Federal Register, but after some analysts cast the review as big trouble for the industry and others began bombarding the department with calls seeking clarification, Shireman decided to hold the unprecedented conference calls.

But Shireman’s insistence in the calls with for-profit investors and analysts that he would be an equal opportunity regulator was offset for some Wall Street watchers by a Deutsche Bank analyst’s report that, in a call the day before with officials of traditional nonprofit colleges, he had talked about the department’s desire to find “victims” who had been wronged by for-profit colleges that give incentives to their student recruiters.

According to several accounts of the call with nonprofit college leaders, though, Shireman spoke of “victims and lawyers for those victims” only in response to a question that used that phrase, saying that the department would seek to protect students who were wronged by unscrupulous practices wherever they occurred.

Department officials have expressed increasing frustration that their assertions that they do not plan to single out for-profit colleges are keep getting ignored or twisted in meaning. Experts on career colleges offer differing reasons why.

Some believe it’s because the thesis just makes sense, given the backgrounds of the players and of the sector. Obama has made no secret of his disgust with the larger corporate culture that contributed mightily to last fall’s financial meltdown, and Shireman, as a former Congressional and Clinton White House aide and as an advocate for low-income students, has long fought for policies that protect students from excessive debt and seek to ensure that they get a meaningful education.

While he has not been openly critical of for-profit colleges to any significant degree in the past, he can fairly be said to see himself as a protector of the type of needy students that predominate at for-profit colleges, and to be simpatico with consumer protection groups that see themselves as watchdogs of the for-profit sector, which went through a wrenching scandal in the late 1980s that flushed many bad actors out of business.

Trace Urdan, who analyzes for-profit colleges for Signal Hill, describes this line of thinking about the career college sector as being a microcosm of fears about the Obama administration’s overall approach to corporate America. “It’s as much about Wall Street’s paranoia about Obama as about the Education Department,” he said. “The fear isn’t about the details of incentive compensation. The fear is that Shireman thinks that somehow Apollo is robbing students and taxpayers.”

But other analysts and many leaders in the career college sector offer a more nefarious explanation for the drumbeat of assertions that the department is gunning for for-profit colleges. They attribute the stream of analyst reports to “short sellers” (investors who buy and sell stocks in patterns that reward them when the stocks tumble) who have been trying (unsuccessfully) for several years to drive down the price of shares of the publicly traded higher education companies, which have generally outperformed the overall stock market for more than a decade.

At a time when the enrollments of for-profit colleges are growing and the government is pouring billions more dollars into Pell Grants and other programs that aid the low-income students who populate career colleges, these investors are turning to “nonsense” like the assertions about increased regulatory scrutiny to drive down the institutions’ stocks, Harris N. Miller, president of the Career College Association, said in an interview Monday after Madzelan’s speech.

“I don’t know how the department could be any clearer in its public statements” than it has been, Miller said. “To me you just have to take them at their face.”

“We’ve been working well with the department,” said Arthur Keiser, president of Keiser Colleges, a Florida-based chain of colleges that is privately held and therefore not subject to the recent stock swoon. “There’s a lot of paranoia out here, but I think we’re all focused on the same thing: making sure students succeed. They want that and we want that.”

Jeffrey Volshteyn, a vice president at J.P. Morgan, is among the analysts who thinks that “people are just reading way too much into this,” and that the department will “enforce the rules just like it always has,” for the for-profit colleges and all others.

Jeffrey Silber of BMO Capital Markets, who is among the longest-serving analysts of the career college sector, tends to agree with Volshteyn that the department is not taking particular aim at for-profit colleges. But he also said that the uncertainty about the department’s agenda for rule making (an agenda that will take shape, in part, out of public hearings that begin this week) and the general inclination toward regulation of a Democratic administration are likely to provide plenty of fodder for those who seek to keep for-profit colleges -- and their stocks -- on the defensive.

“Could you see increased regulation” of for-profit colleges? he asked rhetorically. “Sure, though probably on the margins. But this thing is not going to be resolved for months, and there’s no telling what kind of noise will be generated in the meantime.”